Should Weakness in Chi Sheng Pharma & Biotech Co., Ltd's (GTSM:4111) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

It is hard to get excited after looking at Chi Sheng Pharma & Biotech's (GTSM:4111) recent performance, when its stock has declined 5.8% over the past month. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Chi Sheng Pharma & Biotech's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Chi Sheng Pharma & Biotech

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Chi Sheng Pharma & Biotech is:

6.8% = NT$72m ÷ NT$1.1b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.07 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Chi Sheng Pharma & Biotech's Earnings Growth And 6.8% ROE

At first glance, Chi Sheng Pharma & Biotech's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.1%. On the other hand, Chi Sheng Pharma & Biotech reported a moderate 6.5% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Chi Sheng Pharma & Biotech's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 5.9% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Chi Sheng Pharma & Biotech's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chi Sheng Pharma & Biotech Making Efficient Use Of Its Profits?

Chi Sheng Pharma & Biotech has a significant three-year median payout ratio of 71%, meaning that it is left with only 29% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Besides, Chi Sheng Pharma & Biotech has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we do feel that Chi Sheng Pharma & Biotech has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Up till now, we've only made a short study of the company's growth data. You can do your own research on Chi Sheng Pharma & Biotech and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

If you decide to trade Chi Sheng Pharma & Biotech, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.